What if growth is the problem?

The United States is fixated on growth. From the President and Congress to each city council to the talking heads on CNBC to the chronically unemployed, we're all looking for "growth" to solve the economic problems we now face. But what if, instead of being the solution, growth is actually the problem? What if growing, at least the way we undertake it, is actually making our situation worse?

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The United States economy had experienced a boom leading up to the Long Depression of the 1870's. Improvements in technology, particularly the construction of the railroad system and the beginnings of industrialized manufacturing, had produced enormous productivity and efficiency gains that were reflected in the broader market. Speculation in continued success drove stock values higher.

This all reversed in the 1870's, beginning with the Panic of 1873. We had overbuilt the railroad system and, with an oversupply in rail, the profits were not there to justify speculative stock values. Farmers were so productive that they were overproducing, increasing the supply and driving down the value of their commodities. There are reports of farmers burning their corn crops because the corn had more value as fuel than food.

We recovered from depression when we experienced, as author Richard Florida has discussed in The Great Reset, a spatial shift in our living pattern. People left farms and the ways of economic growth they had known for centuries and moved into industrialized cities where they took jobs in factories. This shift in population rebalanced our economy, particularly the balance between ag and non-ag production.

Even though it had created prosperity up to that point, building more railroads and growing more crops was not going to create additional prosperity. In fact, due to the diminishing returns, continuing to do both was actually making the problem worse. It was only when we stopped building additional railroad lines and people left farms that we were able to recover.

A similar situation can be observed in the Great Depression. Rampant speculation in the 1920's fueled growth and, when profits failed to keep up with expectations, things went bad. Investors that had leveraged a dollar to purchase $100 in stock found themselves wiped out with just a tiny tick downward. And the tick downward was inevitable; at some point our overall productivity exceeded our ability to absorb everything we could produce.

Some today argue that the New Deal ended the Depression. Others that it was World War II. But there was tremendous concern at the time that the end of war would renew America's economic problems. It didn't, largely because of another spatial shift, that being suburbanization.

We took the excess productive capacity of our economy and put it to work building the interstate highway system and suburban America. There was a tremendous migration that fueled this building as Americans moved from industrialized cities to the suburbs. The high rate of return of these early investments created unrivaled prosperity for the United States, which was the world's strongest economy.

We're now two generations into the great experiment that is the American development pattern and our economy is stalled. How will we know if we've run out the clock on this approach? How would we know if, like the Americans of 1870 that had overbuilt the railroad system, we had overbuilt our highway and road systems? How would we know, like the Americans of the 1930's, that our productivity and efficiency had actually started to create diminishing returns? What signals should we look for that indicate doing more of the same thing will actually make us worse off?

I would suggest two things. First, in the runup to both of these earlier crisis there was a runup of debt-fueled speculation. This is easy to understand. A healthy economy runs largely on savings and investment. People are doing well, they have money to save, that saved money is then invested which creates a virtuous cycle. When prosperity slows, we turn to leverage to fuel growth. Prior to the 1870 and 1930 crisis, we see large increases in leverage.

Of course, our recent prosperity has not been fueled by wise government investments in infrastructure or by savings. It has been fueled by leverage. In fact, with the Collatoralized Debt Obligation and other forms of securitized debt, we have become experts in creating leverage. I like to point out that, when GM went bankrupt, they were losing money making cars but they were making money financing cars. Credit has become our economy, as you can see in the following graph (the green line is private sector debt).

It is interesting to note that this runup in credit, which began in the late 1970's, corresponds to one life cycle of the American development pattern. We built the initial highways and suburbs with savings and investment but have continued that pattern into a second generation using leverage. This brings me to the second sign that this approach has runs it course and that is the diminishing returns.

When we originally built the 35W bridge in Minneapolis it created a new corridor across the Twin Cities metropolitan area. Private sector growth and development followed, with the new bridge and corridor providing a platform for commercial and residential construction. When that bridge reached the end of its life cycle and failed catastrophically, we spent $234 million replacing it. Besides the construction process, how many new jobs were created? How many new homes were built or new businesses opened as a result of the replacement of the bridge? Likely none, but if there were any, it was very few.

The first time we built the bridge we saw tremendous return. The second time we saw little or no return. There is an enormous maintenance liability with these systems that we rarely stop to consider.

I look at some of the local projects here and see the same diminishing returns. Widening a local shortcut will cost millions but there is little likelihood it will create any new growth. Nobody is going to invest more, certainly not significantly more, in the community because we've shortened their trip across town by 45 to 75 seconds. A highway to Staples, MN connected that city to the world, but a $9 million bridge over that highway will create no comparable value. These are projects of inertia, not prudent investments of a heavily indebted society in transition.

No other country in the world has occupied the land in the way that we have. Our current development pattern is truly an experiment unprecedented in human history. From a bottom-line perspective, it may have generated some financial ROI early on, but we've long past the point of diminishing returns. We've run out our ability to leverage in the private sector, while the public sector continues to pour more borrowed funds into this same approach. And, of course, we have tremendous legacy costs involved in maintaining the systems we have created, an obligation we have no capacity - or desire - to meet.

Do we need more growth? If it is more of what we are currently doing, it will only dig our hole deeper. What we need is a new development model that actually creates prosperity. Only then will growth be the solution. Until we adopt a Strong Towns approach, growth is the problem.

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